Web Notes > Microeconomics

Demand, Willingness to Pay and Marginal Benefits

The demand curve for a good originates from individuals' willingness to pay for it.

Conceptually, it is constructed as follows: (1) start with a high price; (2) ask all potential buyers how many items they would be willing to buy at that price; (3) mark that price and quantity on a graph; (4) decrease the price slightly and repeat the process.

A person's willingness to pay for something shows the dollar value she attaches to it. Her willingness to pay for one more unit of a good is thus a dollar measure of the benefits the extra unit of the good gives her. As a result, the terms "willingness to pay" and "marginal benefit" are often used interchangably.

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Revised 01/15/2004